LONDON (BLOOMBERG) - The pound fell after British Prime Minister Boris Johnson ratcheted up the chances of trade negotiations failing with the European Union (EU).

Sterling declined as much as 0.6 per cent against the US dollar, extending its drop to the longest since June, as Mr Johnson prepared to tell the EU he's willing to let talks fail rather than compromise on what he sees as core Brexit principles.

"It looks that we are only at the beginning of a painful correction lower in the pound," said Mr Valentin Marinov, head of Group-of-10 foreign-exchange strategy at Credit Agricole SA, who sees the pound dropping to US$1.20 (S$1.64) in the event of no-deal.

The cost of hedging against swings in the pound out to six months is at the highest level since at least July, with the three-month tenor covering the US election as well as Brexit developments.

There is little sign of increased investor concern among risk reversals, gauges of market positioning and sentiment, which are at their least bearish since March and largely unchanged following Monday's news.

Talks between the two sides are set to continue this week. The UK currency had touched the highest level this year last week amid broader weakness in the dollar.

Investors are refocusing on Brexit, with the two sides accepting they need to reach a deal by October in order to pave the way for a smooth exit at the end of the year, when the Brexit transition period ends. A so-called cliff-edge departure could add to the economic strain on Britain from the coronavirus.

BREXIT HEDGE

JPMorgan Chase & Co strategists recommend a traditional bond-market hedge against a chaotic Brexit. They suggest selling 10-year Irish debt, which would suffer given Ireland's close trading relations with Britain, and buying French bonds instead.

"Our economist's assessment remains that the chance of no-deal is about a third, but with brinksmanship part of the process, it may appear higher than that in coming weeks before agreement is reached," strategists including Aditya Chordia wrote in a client note.

The pound fell 0.4 per cent to US$1.3226 as of 8.49am in London. It slid 0.4 per cent to 89.53 pence per euro.